Private-sector workers will see their occupational pensions reduced because of
the new flat-rate state pension but public sector workers will escape
similar cuts, ministers have admitted.

The Coalition has set out plans to simplify state pension rules into a new “single-tier” system where almost everyone who retires after 2017 gets the same state pension, worth around £145 in today’s money.

The simplification will benefit the self-employed and people who have taken time out of work to care for children or relatives, since they will now be able to qualify for full state pension.

People with less than 10 years of work or care in the UK will not qualify for the new pension, excluding some foreigners who come to the country temporarily.

Economists at the Institute for Fiscal Studies estimated that “the vast majority” of people will end up with reduced pension entitlements compared to what they would get under the current rules. Anyone born after 1970 is likely to lose out, the IFS suggested.

“The main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups,” the IFS said.

The impact of the changes will be felt unequally across the workforce too, the economists noted.

The Daily Telegraph revealed on Saturday that more than 6 million workers who are part of final salary pension schemes face higher taxes because of the changes. Around 1.6 million are in the private sector.

Steve Webb, the pensions minister, said that under the new rules, most of the 6.9 million people affected will eventually get a bigger pension than they would otherwise have done.

But around 700,000 will be worse off, he admitted, adding that most of the “net losers” from the tax rise will be higher-earners in the private sector.

As well as increasing workers’ tax payments, employers will also face higher taxes, paying around 3.8 pence in the pound in National Insurance Contributions.

That could cost a company an extra £1,200 a year for an employee paid £40,000.

Raj Mody, head of pensions at PWC said the higher NICs bill would “give employers yet another reason to close the few remaining final salary schemes still open to existing members”.

The higher NICs payments will raise almost £6 billion a year for the Treasury from 2017, Mr Webb said.

To offset the higher costs now facing private sector employers, they will be allowed to reduce the “accrual rate” of their pension schemes, reducing the sums paid to workers on retirement.

While public sector employers like the NHS and local councils also face higher NICs bills under the reform, there will be no changes in the pension right accrued by their employees.

Mr Webb admitted that the effect of the reform would be that some private sector workers will now get smaller occupation pensions while public sector staff in a comparable situation will not.

If ministers had not allowed private sector employers to make their pensions less generous, many would be forced to close their schemes altogether, he said: “Firms have said they want that freedom.”

The minister said that Government has ruled out any reduction in public sector pension accruals because of a deal they made with trade unions last year to leave public sector retirement rules unchanged for at least 25 years.

The different treatment of private- and public-sector pensions has led to allegations of “two-tier pension system. The CBI, Britain’s biggest business lobby, has said that pensions in both sectors should be treated the same way.